Last Updated on August 18, 2020
Before starting your business, it is vital to understand the key differences between establishing a member-managed or manager-managed LLC. In most states, new Limited Liability Companies are by default selected to be managed by the members unless a different management structure is selected in the articles of formation (typically the articles of organization) and operating agreement.
Note that regardless of how the LLC is managed, the liability protection remains the same. Learn more about the differences between member-managed vs manager-managed LLCs.
In LLCs, the business owners are referred to as “members.” LLCs must have at least one member, but there is no maximum amount of members. Member-managed LLCs are the most popular, particularly with small businesses since there is typically less need for outside management in the beginning stages or is a single-member LLC. This means that the members are required to have a more hands-on role in the company’s day-to-day operations.
In a member-managed LLC, all the LLC members share day-to-day management responsibilities and have input in decision-making for the business. Each member is considered an agent of the LLC and has the power to legally bind the other members in contracts, loan agreements, and other actions. Members also all have voting power, which may be equal among the members or divided differently for each member.
In a manager-managed LLC, the members elect or hire one or more managers to handle the company’s day-to-day operations. Members still have authority over the bigger issues facing the company and act as a board of directors. The manager is the principal legal agent who has management authority on the daily decisions of the LLC. The manager can be a member, but it is not required. A manager may be another LLC or a corporation unless your state sets restrictions on the types of entities that may be managers of an LLC.
A single-member LLC may also be managed by a manager if the sole member wants.
Pros and Cons
Due to the differences between the member-managed and manager-managed Limited Liability Company, it’s important to understand the advantages and drawbacks of each.
This business structure may be a good fit for your business if all members want to have a voice in management decisions. It’s also easier to establish a member-managed structure, especially for smaller businesses with fewer members. Operating in this manner also typically costs less than hiring one or more professional managers.
The daily management required by the members can be too time-consuming and distract from individual members’ desired projects within the company. Using this structure can also make it difficult to raise money from investors since there is no role to offer passive investors in your company.
Establishing the manager management structure makes it easier for others to become passive investors in your venture. Having managers also streamlines the daily decision-making process without the necessity to take a member vote each time. For bigger LLCs, this structure centralizes authority for business decisions.
However, this structure requires more thorough documentation and funds to pay the salary of a professional manager.
Things to Consider When Choosing
Before forming the LLC, the articles of organization will ask whether the LLC is member-managed or manager-managed. The articles of organization are the formation document that is used to create an LLC with the state
Many states don’t require an operating agreement, especially in the case of either a multi-member LLC or manager-managed LLC one should be created. An operating agreement is a legal document governing the LLC’s operations with topics such as the roles and responsibilities of the members, distribution of profits, decision-making authority, and more.
It is also important to consider whether you are planning to obtain passive investors for your small business. You will also want to make sure your company has the funds to pay for the salary of any prospective manager(s).
If you intend to be the sole member or only have two or three other co-owners, the management roles and voting rights may be easier to manage under a member-managed LLC.
If you enjoy running your business’s day-to-day operations, you may prefer to be member-managed or suggest to your other members that you be elected the manager in a manager-managed structure.
How to Change the Management Structure of an LLC
To make any changes to your LLC, you will first need to vote among the members to approve the changes. After a majority vote passes, you will need to file an amendment with the state agency that governs business filings in your state.
Your management structure will be listed on the operating agreement and articles of formation filed with your state. While many changes to your business do not require a formal amendment of the formation documents, switching your structure most likely warrants an amendment in your state. The proper amendment is an important step to ensure that the state is updated with accurate information about your LLC.
For other changes, such as ownership shares and roles of each member and manager, these can easily be changed upon a vote and then through amending the company operating agreement.